Wednesday, November 7, 2007

The MRE Economy

MRE: Meal, Ready to Eat. It is a self-contained, individual field ration for the US military.
_______________________________________________________________

It is becoming quite obvious that our global economy is reaching its own MRE nexus: Maximum Resource Extraction. Be it in energy, metals, foodstuffs, clean water, habitable and arable land or climate change, man is stressing the Earth as never before. All comparisons with the past are now inapplicable, because the scale at which we are stripping our planet of resources is orders of magnitude greater and more intense than in the past.

To those that have been studying this now permanent crisis, it's not news. The very first time I came upon the term "global warming" was in 1982, in a Foreign Affairs article titled "Society, Science and Climate Change". I will never forget it because I was just out of engineering school and on vacation in Hawaii, right before starting my first job. I read the article while laying on a pristine beach in Kauai. I remember thinking ...this has nothing to do with me; it is so far in the future that I will be long dead before anything really important happens. Wrong is a five letter word, but it might as well have been eleven: wrong plus stupid... But at least it made an impression, because I still remember it after a quarter century.

Much later (2001), as oil prices were starting their upward move, I read John McNeill's Something New Under The Sun (see the books sidebar) and it changed the way I saw things. It dawned on me that mankind is now a much more significant force than Nature and that its actions are affecting our environment, economy and society in profound and time-critical ways.

Putting the two MRE's together, our global economy is only able to function and "grow" in its present form because it is extracting and consuming scarce "ready" resources at maximum capacity. For example, oil is a form of solar energy that was concentrated and "cooked" for us hundreds of millions of years ago. We are consuming it at maximum right now. If you don't believe it (I don't mean Peak Oil, that's another matter), just think of this: the only reason that Alberta's tar sands are a profitable operation is because we are burning natural gas to produce steam for the separation process. From an energy balance perspective, it's a losing proposition. Yet, under MRE conditions, dollars and BTUs have become so unbalanced that people are still willing to accept paper (i.e. debt) instead of equivalent goods, because they think they will be able to exchange it for other goods in the future. Obviously, the negative energy balance says otherwise.

Another example of MRE imbalances is China: hundreds of millions of people are willing to work for a relative pittance - and save a large percentage of it. They do not realize that they are essentially performing an energy arbitrage for the benefit of foreign consumers. They are being paid the equivalent of two bowls of rice daily and provide wealthy Westerners the ability to consume the energy difference contained in their products, as cheap sneakers and t-shirts. But what if the value of their paper savings measured in energy and food terms diminishes rapidly, as is happening right now? Or, worse still, what if the their current wages no longer buy two bowls of rice? Multiply this by 1.3 billion souls and you can bet we are in for upheavals.

And how about stock prices? "Investors" are still willing to believe that there will be enough readily available resources (and steady climate) around for decades on end - otherwise why would they pay P/E multiples in the 40s and 50s? Is this a good bet? Because looking around I see that some other "investors" are betting heavily against them: oil reached $98 today. The two are mutually exclusive, except during that tiny fraction of historical time when holders of paper believe themselves wealthy.

Do a simple calculation: add up all the ready energy reserves in the world (oil, gas and coal) at today's prices and subtract 20% as cost (average EROEI of 5). Then compare to the value of all the shares, debt and fiat money floating around. You will find that there aren't nearly enough energy resources around to cover all those claims on future economic activity. And if we want to be even remotely realistic, we need to subtract from our energy resource balance the rapidly rising environmental costs, lowering our ultimate EROEI to perhaps 3, or even less.

Simply put, our Meals, Ready to Eat are not enough to cover all those meal tickets we have issued.

32 comments:

Anonymous said...

Great insight as usual Hellasious,

the divergence between physical economic sphere and financial sphere is rapidly approaching breaking point.

simply put buttom up and topdown accounting is totally mismatched.

kaan

Al said...

Great post! I really like this 'order of magnitude' style argument -- very hard to refute! For similar calculations on global resource consumption you might enjoy David MacKay's forthcoming book 'Sustainable Energy - Without the Hot Air':

http://www.withouthotair.com/

MacKay is a very switched-on guy, worth listening to

Anonymous said...

When you get down to it, all activity on Earth is based on the sunlight that falls on the planet. That is the source of calories and energy, normally through photosynthesis and climatic energy. We found a way to dig up sunlight and release its energy through combustion (assuming that oil really is dead dinosaurs and plants). Once that is burned up, we are back to the old energy balance, or carrying capacity. Unfortunately then, we suffer and environmentally imposed population reduction.


Jason B

eva peron said...

Malthus has always been correct.

Famine (climate change)
Disease
War

Take your pick or try our special combo plate. All three of these things are constantly at play to reduce the strain of overpopulation. It took a century for human populations to explode; it'll take a while to work off the excess.

Anonymous said...

If you had to recommend one book for greatest educational value on your sidebar, which would it be?

Anonymous said...

"It dawned on me that mankind is now a much more significant force than Nature"

"Man is stressing the earth..."

The arrogance inherent in those comments in blinding. MAN IS AN INTEGARL PART OF THE EARTH. HE IS PART OF NATURE.

To assert anything to the contrary is to believe that man dominates the planet and is "responsible" for it. What idle claptrap! Man arrived on the planet as an insignificant guest... and man will leave the planet in the same way and - guess what - the planet will go on as before, hardly even aware of man's fleeting visit.

Hellasious said...

Man vs. Nature. Claptrap?

Man IS part of Nature of course. But the mere fact that we have managed to alter the Earth's climate and biodiversity by so much (and probably more to come) shows what a bunch of deleterious animals we have become.

Are you aware that Man is killing off several entire species on a DAILY basis? This anthropogenic extinction (and many more effects) is what I had in mind when I said my "claptrap".

Regards

Hellasious said...

"If you had to recommend one book for greatest educational value on your sidebar, which would it be?"

Depends on the subject:

For an understanding of resource utilization history, population, etc., it would be "Something New Under The Sun".

For probability and risk, "Against The Gods".

For market history in the late 19th and early 20th centuries, plus great insights on manipulations, etc., "Reminiscences of a Stock Operator". A lot of what is going on TODAY in the market can be recognized from this book. Be warned: this is a deceptively simple book. Do not try what Livermore did without being an expert.

If you tell me the subject perhaps I could recommend some more...

Regards

James said...

Excellent post as usual.

Waas said...

Am I missing the book sidebar? I don't see it on my screen. I need some new books to read, and I love reading what you post.

Anonymous said...

With no disrespect intended towards our beneficent host, the book I would recommend above all others, is Lewis Mumford's "Pentagon of Power the Myth of the Machine".

Just go to amazon and read the reviews. The book changed my perspective on everything discussed in this blog.

Waas said...

I found it, I had to take off my adblocker.

Mencius Moldbug said...

Hellasious,

Your posts are excellent and you worry about many things worth worrying about. However, I'm not sure this is one of them.

Try your engineering skills on this. And remember what Buffett said: you never find just one cockroach.

Juan said...

not binary, either part or not part of nature, but both part and not part, dialectical unity of contradiction which must be understood as process... from the earliest attempts to control nature through shamanistic practices right into capitalism with its hypertrophic production of an artificial nature standing ever more intensely against its natural basis.

'in the contradiction lies the hope', brecht.

Anonymous said...

well if i had to come up with a plan to ruin the planet not sure i could do a better job of it

i just hope there are no weird nasty bugs frozen in that dinosaur crap thawing in the siberian tundra

i hate weird nasty bugs

probably be pretty mad too what with being frozen a few zillion years and all

oh well, sure the technogeeks can handle it even if we lose a few billion people

now where is that remote...

Greenie said...

You are smart, but have commie bias somewhere deep in your heart.

Don't you believe in invisible hands?

Greenie said...

That comment was addressed to Hellasious.

Yoski said...

Some numbers for yesterday's fuel efficiency per passenger discussion:

http://en.wikipedia.org/wiki/Fuel_efficiency_in_transportation
Most to least efficient:
bike, train, bus, walking, airplane, hybrid car, regular car,
helicopter.

Got to go and cash in some of those meal tickets before the line gets too long :)

Anonymous said...

I find it difficult to imagine a society that is not based around growth and consumption. The current world is so geared towards that it would be next to impossible to switch to a different model, even if there was one. The need to find happiness and fulfillment through consumption isn't going away.

So the result will be a planet that sucks itself dry and becomes an unpleasant place to live for the majority. Haiti is the role model for the rest of the planet. There was an article, I think in the Atlantic, a few years back that speculated we'd live in a world of weeds and cockroaches as those were capable of thriving when everything else was nearing depletion.

Is there an alternative to consumerism? Maybe. But consumerism is so easy to understand. "Buying things = happiness". Attempting to live a simple, spiritual, ascetic life where happiness comes from people around you, not things, is not so easy to get one's head around. That's just human nature.

The Lorax said...

Someone mentioned Haiti... check out Jared Diamond's last book, "Collapse" for the chapter comparing Haiti to the Dominican Republic for two drastically different approaches to the same ecosystem.

Or just take a peek at Hispanola on Google Earth.

Edwardo said...

Yours is a fearsome message, yet lovely in its undeniable veracity.

So on that note, let the discounting of paper assets commence, or more accurately, let it accelerate. That which has intrinsic value ultimately will be all that is valued, but the complete transition from our present global system to one that is based on something other than paper will take a bit more time, and I fear, far more chaos.

In the meantime, we are now seeing fiat currency, not just the dollar, but all fiat currency, depreciate against items which have intrinsic value.

Hellasious said...

Re: commie bias (!) and the invisible hand.

Interesting comment. For several months now I have been thinking that the invisible hand is inapplicable in a world of 6.3 billion where resources are becoming terminally depleted.

But it has nothing to do with "communism"; rather it has everything to do with Thermodynamics, specifically the Second Law.

I have been writing a longer article along those lines for The Oil Drum, which I hope to finish pretty soon.

Regards

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